Hc12f01351 v Blueco Limited

A clearly worded contractual condition is not converted into an unconditional entitlement merely because the specified event has become unlikely or a commercially similar event has occurred. Commercial purpose cannot justify rewriting rather than interpreting the contract. Rectification principles permit correction only where it is clear that something has gone wrong and what the parties objectively meant. Costs should be apportioned between an ordinary construction issue and a rectification claim involving conduct that takes proceedings out of the norm.

Prudential appealed from an order of the High Court concerning its alleged right under the Tenth Schedule to a Management Lease to acquire a further 15 per cent share of income from the Bluewater Shopping Centre. Following a 1998 restructuring, the BMBF Option was cancelled, and Prudential argued that the pre-emption should be interpreted as though that option had been exercised or omitted from the lease.

The High Court rejected Prudential’s construction, dismissed its rectification claim and ordered indemnity costs. Prudential abandoned the rectification appeal shortly before the hearing. The Court of Appeal therefore considered the contractual construction and the appropriate costs order.

Disposition. The Court of Appeal dismissed the appeal on construction. It varied the costs order. Prudential’s appeal against rectification was abandoned before the hearing.

1. The Chancellor held that paragraph 2.2 of the Tenth Schedule was clear in isolation and remained clear when read against the admissible background. It conferred a conditional right, dependent on specified action by Blueco or BMBF. Prudential’s proposed interpretation would turn that conditional right into an absolute entitlement on 30 September 2011. That was a re-writing of the contract, not its interpretation. The principle stated in Chartbrook Ltd v Persimmon Homes Ltd [2009] 1 AC 1101 did not assist because there was no clear mistake requiring correction.
2. The 1998 restructuring was not meaningfully analogous to exercise of the BMBF put option. It was initiated for Blueco’s tax planning, reduced but did not eliminate BMBF’s participation in the lease structure, and did not provide the same exit from the financial commitment. The parties knew that the BMBF Option was to be cancelled and deliberately left paragraph 2.2 unchanged.
3. Clause 21 of the Forward Sale Agreement did not support Prudential’s construction. Any adverse economic consequence was too remote and contingent on independent commercial decisions. Prudential had not established a material adverse economic effect.
4. Indemnity costs were justified for the rectification claim because the unsupported allegation of sharp practice took that aspect of the proceedings out of the ordinary. The construction arguments were not frivolous. Costs therefore had to be distinguished: all costs were payable on the indemnity basis except costs necessarily incurred on construction alone, which were to be assessed on the standard basis. Prudential bore the burden of identifying those costs.
5. Briggs LJ agreed with the result and reasoning, but observed that where a document is executed solely pursuant to an earlier contractual bargain, the factual matrix at the date of that earlier bargain may be the better guide to interpretation. He described that point as strongly arguable and unnecessary to decide. Interpretation and application remained distinct processes. Proudman J agreed.

• Court of Appeal (Civil Division): In [2014] EWCA Civ 154, dismissed the appeal on contractual construction and varied the indemnity costs order.
• High Court (Chancery Division): By an order dated 3 May 2013, accepted Blueco’s interpretation, dismissed Prudential’s rectification claim and ordered indemnity costs.